Creditors claim city negotiating backroom deals

Bankruptcy judge asked to void police contract

STOCKTON - Creditors battling Stockton in bankruptcy court take issue with the city's new police contract, which upon approval this month erased a $13 million lawsuit officers filed in exchange for a few extra vacation days.

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By Scott Smith

recordnet.com

By Scott Smith

Posted Dec. 24, 2012 at 12:01 AM

By Scott Smith

Posted Dec. 24, 2012 at 12:01 AM

» Social News

STOCKTON - Creditors battling Stockton in bankruptcy court take issue with the city's new police contract, which upon approval this month erased a $13 million lawsuit officers filed in exchange for a few extra vacation days.

The city next seeks to settle a minor lawsuit by comparison, paying $55,000 to a man who said officers in 2010 roughed him up. In the proposed deal, Christopher Hallon will drop his suit, and the city will have one fewer lawsuit to fight.

Yet, capital market creditors, who stand to lose millions invested into Stockton, objected to both instances in court papers made public Thursday. They accuse the city of skirting the bankruptcy procedure designed to treat all of its creditors fairly.

"If Chapter 9 means anything, it means that a debtor cannot sidestep the plan process so easily and effortlessly," attorneys said, accusing the city of secret dealing.

Stockton filed Chapter 9 on June 28, making it the nation's largest city to seek bankruptcy protection. Officials cited years of overspending, high employee pay and the economic recession for Stockton's collapse.

Assured Guaranty Corp. and National Public Finance Guarantee Corp. are two bond insurers that object to the city filing Chapter 9 in the first place.

In overarching arguments, they accuse Stockton of failing to take enough austerity measures before filing bankruptcy, and officials didn't negotiate in good faith by not asking California Public Employees' Retirement System, the city's largest creditor, to renegotiate its contract.

In this subplot regarding settlements, creditors contend the city is attempting to make an end-run around the bankruptcy process by resolving lawsuits outside of court.

Stockton voluntarily filed Chapter 9, which the creditors say puts the city by its will under a judge's control. By bringing proposed settlements to court, the creditors say they would have a say in any deals that might treat them unfairly.

The creditors fear that because they are locked up in bankruptcy court, they will end up with pennies on the dollar, while favored litigants making side deals will be compensated fully.

Stockton has yet to file a response, but the city's lead bankruptcy attorney, Marc Levinson, has argued that the judge does not have the power to dictate how the city spends its money or sets policy.

U.S. Bankruptcy Judge Christopher Klein also acknowledged the limits of his powers early in Stockton's case, ruling that he could not force the city to resume paying for retired city employee health care. Yet, Klein also asked for more briefing when posed with this situation last month.

The creditors in court papers argue that Stockton officials overstepped their boundaries when the City Council approved a contract with the Stockton Police Officers' Association. The new contract settles a lawsuit in which officers sought $13 million in back pay.

In the deal brokered outside of court, the city agreed to compensate officers for foregoing back pay, not in money, but with 44 hours of extra vacation time they can use over the next three years. That, creditors say, is an example of the city's "cavalier disregard" for the bankruptcy rules, creditors said.

David Mastagni, an attorney representing the Stockton police union, said that given the judge's prior ruling against the city retirees, Klein is not now going to second guess the city.